5/9/2014

Why Divestment Fails - NYTimes.com

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THE OPINION PAGES

OPED CONTRIBUTOR

Why Divestment Fails

By IVO WELCH

MAY 9, 2014

LOS ANGELES TONIGHT, the 20,000 students at Stanford will

sleep more soundly. Earlier this week, a group called Fossil Free
Stanford persuaded the universitys endowment to divest its stock
holdings from coal-mining companies. The world will be a better place.
Except that it wont be. Individual divestments, either as economic
or symbolic pressure, have never succeeded in getting companies or
countries to change.
Global public equity markets constitute about $60 trillion of
market capitalization. With about $19 billion, Stanfords endowment
represents only about five-hundredths of 1 percent of the worlds
capitalization. Even if Stanford divested itself fully of all its stocks, both
fossil and nonfossil, it would probably take the market less than an
hour to absorb the shares. It would not lead the executives of the
affected companies to engage in soul-searching, much less in changes
in operations.
Proponents of divestment argue that it sends an important signal,
and that other university endowments will follow. Yet all of them
together command only about $500 billion of market capitalization.
Moreover, if divestment really drove down fossil-fuel stock prices,
then there would be plenty of other investors ready, able and willing to
step in to buy their shares, now trading for just a little cheaper than
they otherwise would.
But didnt a similar boycott force South Africa in the 1980s to
abandon apartheid?
Unfortunately not. In an academic study, my co-authors and I

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found that the announcement of divestment from South Africa, not

only by universities but also by state pension funds, had no discernible
effect on the valuation of companies that were being divested, either
short-term or long-term.
And there was no real effect on the composition of their
shareholders between institutional and noninstitutional investors. We
looked hard for evidence linking boycotts and sanctions to the value of
the South Africas currency, stock market and economy. Nothing.
In retrospect, our evidence should not be surprising. For each
investor and business that withdrew, there were others standing by
ready to step in.
True, stating that the impact of economic sanctions was low is not
the same as stating that the isolation of the apartheid regime had no
effect. The wide ostracism may well have weighed on President F. W. de
Klerks mind. But it was not the economic effect of the boycott that
forced him to the table.
Of course, not everything is economics. Morals matter. Would I
have divested from South Africa? Yes, but I would have had no illusion
that doing so would have made a difference. And I would have told
others that, in light of its ineffectiveness, I would have understood that
reasonable and moral individuals could have come to a different
conclusion.
In the case of fossil fuels, the situation is even murkier.
The moral choice is much less clear than it was with apartheid.
Energy is an area with no obvious solutions. Apartheid had no place in
a civilized world. Fossil-fuel companies are supplying a market
demand, one that for the time being cannot be met by other fuel
sources. Divestment wont change that calculus.
And there is no guarantee that the strategy will lead to the outcome
that divestment proponents want. Suppose divestment worked and
coal companies poured their resources into, say, hydroelectric power, or
nuclear. Neither outcome would be a clear-cut win for society or the
environment.
If Stanford really wants to reduce fossil fuel use, it has two better

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options.
For one, Stanford could pay polluters to pollute less and press
institutions that want access to Stanfords intellectual resources. One
way to do this would be to take a 180-degree turn from its current
course and buy up lots of energy stocks, concentrating its holdings and
then using that position to press corporate boards to make changes.
This would be expensive. The values of these companies would
most likely drop, imposing a cost on the Stanford endowment. But
unlike the run strategy, the influence strategy could actually make
boards and executives of these companies take notice.
The second option is to help make both clean and nuclear energy
cheaper than fossil fuels. Stanford has enormous intellectual and
financial resources that have helped revolutionize the technology
sector. Why cant it do the same with energy? This includes not only the
research and development of clean-energy technology, but also its
commercialization.
Neither option is cheap. And neither is necessarily the mission nor
in the self-interest of Stanford. But either would be more effective than
divestment.
Ivo Welch is a professor of finance and economics at the Anderson Graduate School of
Management at the University of California, Los Angeles.

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